Key Writings: Kadlec on the Gold Standard

Can stalemate over the budget lead to monetary reform? The introduction last week of two bills by the Chairman of the Joint Economic Committee (JEC) that would require a serious look at monetary policy suddenly makes such a breakthrough a real possibility. Progress on monetary reform is the overlooked, all important variable that will shape the outlook for financial markets, economic growth and the prospect for balancing the budget of federal, state and local governments, to say nothing of the budget of the average American family.

The differences between the Republican and Democratic budgets are stark and neither is attractive. The GOP budget seeks to balance the budget 10 years from now by reducing the growth in spending to 3.4% a year, repealing ObamaCare while leaving its $1 trillion in higher taxes in place, and reducing the outlays for Medicare through reform. The Democratic proposal would impose a $1 trillion tax increase on the American people, take another $245 billion out of Medicare, cut defense spending by $240 billion due to the draw down in military operations in Afghanistan, and yet would still increase spending by 5% a year and never achieve budget balance.

“Now, most of us agree that a plan to reduce the deficit must be part of our agenda. But let’s be clear: deficit reduction alone is not an economic plan. A growing economy that creates good, middle-class jobs – that must be the North Star that guides our efforts.

In those 49 words, the President articulated a standard by which all economic policies can be measured: economic growth. Advocating growth as the “North Star” also positions the Democrats to take the growth issue away from the Republicans, who ignore this challenge at their peril.

Continued green-eyed obsession with projected 10-year budget deficits based on the jargon of baselines and assumptions that only a few can understand, and fewer still can master, will make them the party of austerity and zero-sum policies. And, that would position the Democrats to hold the Senate and win the House in the 2014 elections on the promise of overcoming the Republican opposition to a new growth agenda.

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... It is deplorable that so few of our elected officials, with the notable exceptions of Rep. Kevin Brady, prime sponsor of the Sound Dollar Act, and Rep. Marsha Blackburn, who successfully championed a national monetary commission as part of the 2012 GOP platform, have focused on moving monetary policy to center stage. Sustained periods of real 4% growth were common before the final link between the dollar and gold was severed in 1971. About half of all the 10-year periods between 1792 and 1971 experienced an annual average rate of more than 4%. But, there has not been one, not even one 10-year period of 4% growth since the Federal Reserve took over responsibility for the value of a paper dollar. Monetary reform, especially a modern gold standard, is not inherently partisan. And in terms of the growth standard, it promises an order of magnitude higher impact, with more winners and fewer losers than any other policy option on the table.

The elevation of reform of our broken monetary system to a bi-partisan economic issue may be the biggest positive development of the next two years. Just last week, two-thirds of the Delegates in the Virginia House voted to “establish a joint subcommittee to study the feasibility of a metallic-based monetary unit.” That follows the lead of the Republican Platform’s call for a commission to consider the feasibility of a metallic basis for the U.S. currency, and last year’s decision by Utah to recognize gold and silver coins minted by the U.S. government as legal tender.

Importantly, there is nothing inherently partisan about favoring a metallic-based monetary unit. George Bernard Shaw, co-founder of the London School of Economics and ardent socialist, in his 1928 book, The Intelligent Women’s Guide to Socialism and Capitalism wrote this about the gold standard:

“You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.”

... Emphasizing growth also means the Republicans will have to stop advocating spending cuts in the name of achieving an ephemeral balanced budget. Instead, reducing wasteful federal spending should be pursued for the sake of freeing resources to the private sector. Every dollar the federal government does not spend is a dollar that does not have to be taken from the private sector in the form of taxes or debt. Therefore, reducing wasteful federal spending will not reduce aggregate demand. What it would do is shift economic activity from the less productive government sector to the more productive private sector, thereby stimulating aggregate output and growth.

The closed-door negotiations over taxes and spending known as the “fiscal cliff” are doomed to fail even if they succeed. The reason: both sides are relying on their own false premise on how to narrow the massive imbalance between the revenues of the federal government and what it plans to spend over the next 10 years.

The false premise championed by President Barack Obama and his fellow Democrats is higher tax rates on “the rich” are the key to fiscal balance.

The false premise championed by House Speaker John Boehner is that the number one driver of future deficits is entitlement spending in the form of Social Security and Medicare.

False premises are dangerous because they lead to bad policies. In the case of negotiating tax increases and spending cuts, the real world results at best will do little to move the federal fisc toward balance. At worst they risk recession and a devastating increase in the deficits of federal, state and local governments to say nothing of family budgets.

There is truth in both premises. More revenues are needed if the federal government is to deliver on its many promises, from its commitment to future senior citizens to providing for a strong defense. And, Social Security and Medicare would both benefit from reforms that would reduce cost but in a way that provided a better product to their respective beneficiaries.